No one anticipated that the milk price would increase from just over 30p/litre in October 2021 to approaching 50p/litre in October 2022, say Andersons authors Mike Houghton and Oliver Hall.
At the same time, agricultural input inflation is running at well over 30%, with very significant increases in feed, fertiliser, energy and labour costs.
Overall though, margins are likely to remain strong for the year ending March 2023 (see “Friesian Farm – summary figures”).
However, with the decline in the UK economic outlook and a reduction of 26% in the global milk price, UK milk prices may well be close to their peak; next year is almost certain to be more challenging for dairy profitability.
Dairy market summary
-Average UK milk price has reached a new high, up almost 20p/litre over 12 months
-Better milk price is likely to largely offset rampant ag inflation – margins will remain strong, but down on 2021-22
-Next year may be more challenging if UK milk prices are close to peaking
-Opportunities exist for those prepared to reduce debt and ready for a challenge
-Better grasp of energy costs, use of renewables, labour costs and working conditions is key
Looking further ahead, Andersons predicts the number of dairy farmers will continue to decline over the next decade, as will cow numbers.
However, both will reduce at a slower rate than the long-term trend (see “Structural change in the UK dairy herd”); over the past 50 years, for example, 87% of dairy herds have disappeared.
Conversely, milk production has increased in that time. The average yield a cow has more than doubled and the average herd size has increased fourfold.
The company believes these trends will continue, although yield increases may slow significantly, resulting in a small decline in UK output.
Interestingly, the milk price has increased tenfold since 1973 and is roughly the same in real terms, according to the Bank of England’s inflation calculator, but its value as a percentage of the retail price has reduced from 50% to just 42% today.
Nevertheless, there will be good opportunities for those who see a long-term future in the industry.
Perhaps the key priority is to capitalise on short-term positive volatility to reduce debt and prepare businesses for the challenges ahead.
Some of the key points dairy farmers and the wider industry need to address in the short and medium term are set out below.
Even with the promised cap in energy prices, many businesses will see a doubling in the cost of red diesel and a trebling for electricity. A much greater understanding of energy consumption on dairy farms will be key.
There appears to be very little data on this, but the AHDB is progressing energy benchmarking. Grant aid via the Farm Equipment and Technology Fund in England should be available.
The increase in energy costs has led to a resurgence in interest in renewable energy, particularly roof-mounted photovoltaic (PV).
Rooftop PV should provide a good return on capital for most dairy farms, particularly if machinery manufacturers address the electrification of yard vehicles. But lead times for rooftop PV are significant.
Labour and working conditions will continue to be a key challenge, to which insufficient value is still attributed by the owners of many dairy businesses.
Robotic milking is being looked at by many, but in most cases this will increase the cost of milk production.
However, family businesses often see this as a price worth paying, providing flexibility and an acceptable lifestyle on what is effectively a 24/7 operation.
Perhaps the most challenging legislation is around increased slurry storage. Grants will be available to increase capacity to six months, providing the storage is covered. The legal obligation (for now) remains four months.
The whole area of storage emissions and slurry use needs a great deal more science applied to it.
In some areas of the UK, grass grows every day of the year and using slurry little and often may well be much more sustainable and efficient than storing it for long periods.
However, legislation is based on fixed dates, with no reference to efficiency of slurry use by bespoke crops and application procedures.
The industry desperately needs a single standard. This should include emissions and sequestration, so that the true greenhouse gas output of the dairy sector is understood.
With cow numbers at just 56% of 50 years ago, emissions have already declined significantly.
Technology is almost certain to help in this area, with the main focus likely to be on feeding and genetics.
Reducing emissions generally improves the efficiency of production and, therefore profit, so this will be a key priority for many.
The wider picture
Future success of the industry will probably continue to depend on ensuring the consumer is properly informed about the world-class standards of health and welfare achieved by UK dairy farmers, and the importance of dairy as a natural component of a well-balanced diet.
The industry’s emphasis should be on quality, not quantity, ensuring that demand is not exceeded, which should continue to maintain a strong retail price.